MIDWEST POWER PRICES. Federal Energy Regulatory Commission Chairman James Hoecker announced July 15 that as soon as the staff presents its findings, the FERC will deal with the complaints filed by Cinergy, Steel Dynamics Inc., and others asking for regulatory relief from the late June run-up in Midwest bulk power prices (as high as $7,500 per megawatt-hour), and for a price cap set at $100/MWh. Nevertheless, Hoecker advised that the FERC was in "no hurry," and that the remedies available to it were not entirely clear. Docket No. EL98-53 (Cinergy), filed June 29, 1998; Docket No. EL98-54 (Steel Dynamics), filed June 29, 1998 (F.E.R.C.).
LINE LOADING RELIEF. Detroit Edison Co. protested a petition filed by the North American Electric Reliability Council that seeks FERC certification for transmission line loading relief procedures which conform with the Commission's pro forma tariffs governing open-access to electric transmission.
NERC's "off-path" TLR rule would permit curtailment to relieve the impact of parallel (loop) flows on grid systems not located directly on the contract path of the curtailed transaction, but Edison contends that the rule will cause problems in systems located around Lake Erie. PECO Energy supports the protest, but NERC opposes any utility-by-utility approach to curtailment, defending its off-path rule as "curtailing those transactions most directly contributing to the overload." Docket No. EL98-52, petition filed June 5, 1998 (F.E.R.C.).
STRANDED COSTS. FERC Administrative Law Judge Bruce L. Birchman issued an initial decision allowing $30.4 million in stranded cost recovery in the long-standing dispute between the city of Las Cruces, New Mexico and El Paso Electric Co. over the proposal by Las Cruces to terminate power purchases from El Paso Electric but have the utility wheel alternative power purchased from Southwestern Public Service Co.
The ALJ found that El Paso had met the test under Order 888 of having a "reasonable expectation" of continuing to serve Las Cruces. The judge offered illustrative annual cost calculations, depending on when Las Cruces would leave the system, figuring $30.4 million on a departure date of July 1, 1998. Docket No. SC97-2-000, 83 FERC ¶ 63,017, June 25, 1998.
NEW YORK ISO. The FERC gave conditional approval to the New York Independent System Operator, provided the ISO members can negotiate modified committee governing procedures to alleviate concerns over its independence from participating utilities. The order calls for the dissolution of the New York Power Pool and its replacement by the New York ISO and the formation of two new entities: the New York State Reliability Council and the New York Power Exchange.
The FERC deferred action on rates, terms and conditions of the ISO's open access tariff. FERC Chairman James Hoecker observed that a single-state ISO has "inherent problems." Commissioner William Massey said he supported the order but would issue a concurring statement noting his fears that some transmission owners could dominate the ISO Reliability Council. Docket Nos. ER97-1523-000, OA97-470-000, June 24, 1998 (F.E.R.C.).
ELECTRIC RETAIL CHOICE. In a restructuring order involving Montana Power Co., the state public service commission approved an electric supply choice pilot for large-volume customers and will begin in November to phase-in a pilot program for choice for smaller customers. In the first phase, 5 percent of the utility's residential, commercial and irrigation customers will be eligible. If the pilot runs smoothly, the PSC will expand choice by another 5 percent of small-volume customers in June 1999, and by 10 percent in August 1999 and each month thereafter until all customers are eligible for choice by April 2000. Order No. 5986d, June 23, 1998 (Mont.P.S.C.).
GAS RETAIL CHOICE. The Georgia Public Service Commission on June 25 voted to open the state's natural gas markets to competition in response to last November's filing by Atlanta Gas Light Co. The PSC called for a new rate design for Atlanta Gas Light services that will levelize customer delivery costs through the year. It will cut rates by $7 million a year, allow market-based rates for interruptible gas sales and drafts guidelines on how the system will operate under competition. Before the vote, members of the PSC had said they expected Atlanta Gas Light to ask for reconsideration because of the complexity of the issues.
RETAIL WHEELING. The Iowa Utilities Board ruled that electric utilities in the state may lawfully decline requests by retail customers to wheel power purchased from another supplier. It also found "no substantive distinction" between direct access or retail wheeling and "buy-sell" transactions undertaken at the direction of a customer where the utility is simply an intermediary providing transmission and distribution. MidAmerican Energy Co. had asked the board to address the issue after one of its retail customers demanded direct access to a competitive energy supplier. The board said that existing state laws setting up exclusive electric service territories covered commodity sales as well as transmission and distribution. Docket No. DRU-98-1, May 29, 1998 (Iowa U.B.).
CREAM SKIMMING. "Cream skimming" by new competitors might force incumbent telephone carriers to trim profit margins and operate more efficiently, according to the Minnesota Public Utilities Commission, in adopting rules to guide local phone competition in smaller, rural areas. The PUC rejected attempts to require competitive carriers to serve the entire service territory of an incumbent carrier and to preempt efforts to serve only the lowest-cost, most-lucrative customers. It added that it could find no evidence that competitive carriers were "flocking to rural areas and harming rural ratepayers." Docket No. P-999/R-97-608, May 12, 1998 (Minn.P.U.C.).
ELECTRIC-TO-GAS DIVERSIFICATION. The Maine Public Utility Commission approved a plan by Central Maine Power Co. to reorganize under a holding company structure to help it enter the natural gas distribution business as part of a joint venture with New York State Electric and Gas Co. To protect ratepayers, the commission imposed a cap of $240 million (about 20 percent of post-divestiture total book capitalization) on the amount the utility could invest in non-utility activities, including the natural gas venture. Northern Utilities Inc., the state's only operating gas distributor, has intervened in a second case to present evidence on CMP expansion in towns it does not serve but is authorized to serve. Docket No. 97-930 (reorganization) May 1, 1998; Docket No. 96-786 (intervention), May 14, 1998 (Me.P.U.C.).
SLAMMING. The Michigan Public Service Commission directed Ameritech Michigan to stop requiring three-way conference calls to verify that customers indeed want to switch service, to guard against unauthorized slamming.
Telephone competitor MCI, had alleged that Ameritech was using the conference calls to dissuade customers from migrating by putting the conference call on hold for long periods or hanging up before verification was complete. Weighing that charge, the PSC ruled that an independent third party or an authorization letter should be enough to verify the customer's intent. It rejected claims that the ruling was "tantamount to blessing the practice of slamming."
In a separate opinion, however, Commissioner John C. Shea said that the case put the commission in a position of both a "regulatory censor," deciding what communications may be made between a consumer and a telephone company, and a "market referee," deciding which competitive activities may be used. Case No. U-11550, May 11, 1998 (Mich.P.S.C.).
PENNSYLVANIA RESTRUCTURING. The Pennsylvania Public Utility Commission has approved electric restructuring plans for the state's major utilities, Duquesne Light Co., West Penn Power Co., Pennsylvania Power and Light Co., Pennsylvania Electric Co., and Metropolitan Edison Co., adopting elements similar to the highly contentious plan approved in late 1997 for PECO Energy.
The new plans phase-in direct access up until the deadline of Jan. 1, 2001, when all customers will have choice. The plans impose a series of rate caps and identify stranded costs to be recovered by each utility. The PUC set a shopping credit for each company, ranging from 3.12 cents per kilowatt-hour for West Penn to 4 cents/kWh for Duquesne customers. R-00974104 (Duquesne), May 21, 1998; R-00973981 (West Penn), May 29, 1998; Docket No. R-00973954 (PP&L), June 4, 1998; R-00974009 (Penelec), June 26, 1998; R-00974008 (Met-Ed), June 26, 1998 (Pa.P.U.C.).
PRIVATE FIRE PROTECTION. The Maine Public Utilities Commission has amended its water utility service rules to include a demand-based method of setting rates for private fire-protection services to achieve a degree of uniformity across the state. The method would allow water utilities to bill privately owned fire hydrants and other fire suppression equipment on the basis of flow demand requirements of each suppression system or the maximum flow available at the end of the customer's service drop, whichever is less. The rule includes formulas and equipment flow rates for allocating costs between public and private systems. Utilities would own and maintain service drops (installed at customer expense) and would bill directly any costs for customer-requested maintenance, repair, inspection or testing services. Docket No. 97-822, June 1, 1998 (Me.P.U.C.).
SHARED TENANT SERVICES. The Oregon Public Utility Commission updated its rules for determining who pays the cost of using shared telecommunications services (services provided on a common basis within a single building or campus) when an end user seeks service directly from a local exchange carrier. Under the new rules, an end user must file a petition requesting an LEC connection and pay a reasonable fee to the shared-services provider for the alternative access. AR336, Order No. 98-190, May 5, 1998 (Ore.P.U.C.).
LOCAL PHONE COMPETITION. The New Jersey Board of Public Utilities has allowed U S West Interprise America, Inc. to provide local and interexchange telephone service (by purchasing transport services) to compete with Bell Atlantic-New Jersey, the state's dominant local exchange carrier. Docket No. TE97090641, May 6, 1998 (N.J.B.P.U.).
GAS PROCUREMENT. The Arizona Corporation Commission has authorized Southwest Gas Corp. to make permanent its two-year-old pilot program under which it shares pipeline capacity to purchase lost-cost gas supplies on the spot market outside the area traditionally served by the El Paso Natural Gas Co. pipeline system. Docket No. G-01551A-98-0184, Decision No. 60905, May 22, 1998 (Ariz.C.C.).
Mergers & Acquisitions
DOMINION + MIDLANDS. Dominion Resources Inc., the parent company of Virginia Power, has sold East Midlands Electricity plc (a regional distributor operating in the United Kingdom) to London-based PowerGen plc. According to Thomas E. Capps, chairman, president, and CEO of Dominion Resources, "We've been frustrated in our ability to grow our assets in the U.K. When you can't grow, you're better off taking out the capital and redeploying it into assets that you can grow."
AT&T + TELEPORT. The California Public Utilities Commission has authorized the merger of AT&T Corp., and Teleport Communications Group Inc., combining several TCG and AT&T subsidiaries operating in the state as competitive local and interexchange carriers (including wireless services). The application was unopposed. Application 98-02-001, Decision 98-05-022, May 7, 1998 (Cal.P.U.C.).
BC + SNET. The North Carolina Utilities Commission has approved the merger of SBC Communications Inc., parent company of Southwestern Bell, Pacific Bell, Nevada Bell, and Southern New England Telecommunications Corp., Connecticut's largest telecommunications carrier, which offers intrastate interexchange services in North Carolina as a reseller. Re SBC Communications Inc., Docket P-473, Sub 1, June 12, 1998 (N.C.U.C.).
WORLDCOM + MCI. The New Jersey Board of Public Utilities has approved the merger of WorldCom Inc. with MCI Communications Corp., noting that the two applicants faced competition from various carriers operating in the state and had forecasted continued growth following the merger, with about 10,000 jobs nationwide. Docket No. TM97120882, April 29, 198 (N.J.B.P.U.).
DUQUESNE + ALLEGHENY. Duquesne Light Co. announced that it will terminate its proposed merger with Allegheny Energy Co. (the holding company of several other regional utilities, including Monogahela Power Co., Potomac Edison Co., and West Penn Power) due to unfavorable stranded cost and independent system operator rulings made by the Pennsylvania Public Utility Commission.
Allegheny disagrees and plans to pursue the merger.
Under the state's electric restructuring legislation, Duquesne was granted $1.3 billion out of a $1.9-billion stranded cost recovery request. Allegheny's subsidiary, West Penn, was granted $525 million out of a $1.5-billion request. The PUC also required as a condition of merger approval that the utilities join a fully functional ISO and take steps to alleviate market power concerns, including the sale of generation assets. Docket No. A-110150F0015, April 30, 1998; Docket No. G-00970574 (L-69) June 29, 1998 (Pa. P.U.C.)
To win approval from the commission, the newly merged company must become a member of a fully functioning independent system operator to manage transmission. The PUC has said that membership in the yet-to-be-formed Midwest ISO would satisfy that requirement. Docket No. A-110150F.0015, April 30, 1998; June 29, 1998 (order granting rehearing) (Pa.P.U.C.).
SIERRA + NEVADA POWER. Sierra Pacific Resources and Nevada Power Co. filed their merger application at the Nevada Public Service Commission on July 7, proposing to divest their electric generating facilities if they complete the deal. They would apply the capital to build more transmission and distribution facilities.
In the application, the companies estimate the merger will save $350 million over 10 years. They propose a long-term rate freeze for transmission and distribution services, plus an incentive mechanism to share merger and other benefits. Earnings greater than a 12-percent return on equity would be shared equally with customers. "In a restructured industry, bigger is better," said Malyn K. Malquist, SPR chairman, president and CEO. On Dec. 31, 1999, electric generation in Nevada will open to competition.
AEP + C&SW. The American Public Power Association and the National Rural Electric Cooperative Association have filed protests against the proposed merger of American Electric Power with Central & Southwest Corp., asking the Federal Energy Regulatory Commission to change its standard of review so as to approve the deal only if the applicants can demonstrate that any diminution in competition is outweighed by "legitimate, verifiable benefits" for consumers.
They ask the FERC also to impose a temporary moratorium on utility mergers involving large companies, but acknowledge that some mergers might enhance efficiency. The AEP/C&SW merger would create the nation's largest power company. FERC Docket No. EC98-40.
Studies & Reports
NEW YORK RESTRUCTURING. The Committee on Energy of the Association of the Bar of the City of New York released a 75-page report on electric restructuring in the state, which claims that other states and electric companies will watch its progress closely. In Electric Utility Restructuring in New York: A Status Report, the energy committee noted that many efforts depicted in the document are emerging and often untested. "This report provides in-depth information on issues, such as current rate plans, stranded cost recovery, divestiture of generation facilities, and retail access schedules, for each of the seven electric companies in the state," said Charles M. Pratt, primary author of the report and a partner at Dickstein Shapiro Morin & Oshinsky LLP. (The report is available at www.dsmo.com.)
NATURAL GAS FORECASTING. According to a new forecast by the American Gas Association, natural gas consumption is expected to increase more than 40 percent by 2015 due to strong industrial demand, greater popularity among new home buyers and increased use in new gas-fired generating facilities. This growth should expand the gas share of the U.S. energy market to greater than 28 percent. A.G.A. predicts continued growth in U.S. natural gas consumption, market share and production through 2015. Total U.S. natural gas consumption is projected to rise from an estimated 22.6 quadrillion Btu (quads) in 1997 to 31.9 quads in 2015. The strongest growth is expected in electric production via gas-fired generation capacity. Electric utilities are projected to more than double their consumption of natural gas through 2015 - a growth of about 4 quads. The 1997 figure for electric generation is 2.9 quads, compared with a projected 6.9 quads in 2015.
NUCLEAR CREDIT QUALITY. According to a new report from Moody's Investors Service, U.S. investor-owned utilities with nuclear generating assets may find their credit quality improving as they restructure in response to deregulation.
According to Restructuring Reduces Fallout From Deregulation for Nuclear Utilities, there now is a "glimmer of optimism" for the future of nuclear utilities. Over the last 18 months, Moody's has upgraded the bond ratings of 12 nuclear operating utilities, while downgrading seven. During that same period, upgrades of non-nuclear utilities versus downgrades numbered five to four. According to Moody's Senior Vice President Mo Ying Seto, the improved ratings are due to decisions by some nuclear utilities to divest their generating assets. That includes the decision to divest traditional generating plants in exchange for stranded cost recovery. Stranded cost investments rendered uneconomic in an open market have tended to be significant because of high costs of constructing, operating and maintaining nuclear generators.
Nevertheless, Moody's has downgraded the credit ratings outlook for Illinova Corp. and its subsidiary Illinois Power Co. from stable to negative, based on a July 6 announcement that costs for replacement power and operations and maintenance for the off-line Clinton nuclear power plant will come in higher than originally forecast, as a 15-percent rate cut in August imposed additional cash-flow pressures on Illinova.
DISTRIBUTED GENERATION. A new Frost & Sullivan report, North American Generators Set Markets, finds substantial interest in distributed generation, with commercial and industrial businesses purchasing such systems for emergency backup power or for cogeneration. The report looks at diesel and gas-fired reciprocating engines, combustion turbines of 500 kW to 10 MW, and microturbines from 20 kW to 500 kW. It provides revenues forecasts, market share, technological trends, competitive issues and strategies. (For more information, see www.frost.com.)
SERVICE TERRITORY SALES. PacifiCorp on July 9 announced that it was considering selling its electric service territories in two of the seven states where it operates - California and Montana - which makes up about 76,000 of its 1.4 million customers (5.5 percent).
PacifiCorp said the move was based on the evolving competitive climate making it increasingly complex to do business in seven states. PacifiCorp plans to begin accepting bids this summer. "These are sound service areas which would represent a real added value for a number of potential purchasers," said PacifiCorp CEO Fred Buckman. "However, we believe these are valuable properties and if we do not receive credible offers, we will continue our ownership."
TELECOM ACT ARBITRATIONS. A federal district court judge has ruled that a new competitive telephone carrier may sue a state utility commission (or individual commissioners) if aggrieved by a state PUC arbitration order issued under sec. 252 of the 1996 federal Telecommunications Act of 1996, which requires incumbent carriers to interconnect with new entrants to speed up competition. The judge said the suit was not barred by the Eleventh Amendment because PUCs necessarily waive sovereignty under the Act. MCI Telecommunications Corp. v. Bellsouth Telecommunications Inc., No. Civ.A. 97-76, June 29, 1998, 1998 WL 352953 (E.D.Ky.).
ABANDONED PLANT. The Oregon Court of Appeals has overturned a 1995 ruling by the state utility commission that had allowed Portland General Electric Co. to include in rates a return on its investment in the abandoned Trojan nuclear power plant. The PUC had boosted rates by $102 million overall and had allocated undepreciated Trojan investment between ratepayers and shareholders. The court acknowledged that state law did permit recovery of undepreciated retired plant, but explained that the PUC had erred by keeping the Trojan investment in rate base at the same time. Citizens' Utility Board v. Oregon PUC, 94C-10372 et al., June 24, 1998 (Ore.App.).
UNIVERSAL SERVICE. A federal appeals court, agreeing with the district court judge, has rejected a petition for a preliminary injunction to block a Kansas supreme court ruling (issued March 13) that required wireless telecommunications carriers to contribute to the state's universal service fund. Sprint Spectrum L.P. et al. v. Kansas Corp. Comm'n, Nos. 97-3180, et al., June 23, 1998, 1998 WL 330874 (10th Cir.).
PRIVATIZATION. The board of directors of the United States Enrichment Corp. on June 29 announced that it would privatize USEC through an initial public offering of securities to the public. USEC is a federally chartered entity owned by the U.S. government, and the board's decision ends an intensive process to determine the best means of privatizing USEC, the world leader in the production and sale of uranium enrichment services for commercial nuclear power plants.
USEC filed a registration statement with the Securities and Exchange Commission for an initial public offering of 100 million shares of common stock at an expected initial price of $13.50 to $16.50 per share. The U.S. government will sell all shares. The decision to sell marks the end of five years of USEC action aimed at privatization.
NUCLEAR POWER PLANTS. The staff at the Nuclear Regulatory Commission has authorized Northeast Utilities to begin restart activities at the Millstone 3 nuclear power plant in Connecticut, conditional on an endorsement from NRC staff regarding pre-operational steps. The Connecticut Department of Utility Control had removed Millstone Unit 2 from the rate base of Northeast Utilities subsidiary Connecticut Light and Power, and was considering similar action for Unit 3 if it was not back on-line by July 1. Docket No. 92-11-11 (N.R.C.).
ELECTRIC COMPETITION BILL. The Clinton Administration released its Comprehensive Electricity Competition Act, which closely resembles the competition plan it released March 25, to little fanfare. The bill further fleshed out the Administration's plans to reform the Public Utility Regulatory Policies Act of 1978 and the Public Utility Holding Company Act of 1935. Under PURPA reform, states would have the authority to impose reciprocity requirements on distribution utilities from other states seeking to enter its electricity markets. The bill also clarifies state and federal authority over retail transmission services. It stated that the Federal Energy Regulatory Commission could exempt from its rules on nondiscriminatory open access the Tennessee Valley Authority, the Bonneville Power Administration and the Southeastern Southwestern and Western power administrations. It is unlikely that any federal legislation will be passed this year.
Virginia Power Nuclear Services, a wholly owned subsidiary of Virginia Power, and NAC International have agreed to provide U.S. utilities with a spent-fuel-management alternative to the storage and transport of spent nuclear fuel by the U.S. Department of Energy. The "Replacement Services Contract" initiative will provide a substitute for services that DOE was to have provided under the "Standard Contract for Disposal of Spent Nuclear Fuel and/or High-Level Radioactive Waste" (10 CFR 961) up to the point of permanent disposal.
The U.S. Overseas Private Investment Corp. will provide $200 million in financial support to the San Pascual project, a 304-megawatt cogeneration plant to be built in the Philippines by subsidiaries of Edison Mission Energy, Texaco, and Caltex Philippines. The plant will supply steam to an industrial complex owned by United Coconut Chemicals and sell power to the National Power Corp., the state-owned utility company of the Philippines.
Itron is installing 487,000 Itron ERT(r) modules for the Philadelphia Water Department and Water Revenue Bureau. The project began in fall 1997 and as of the first week of June 1998, 185,000 modules had been installed.
The local telephone industry again reduced interstate access prices by $600 million for a total of $2.8 billion since June of last year. The reduction in access charges means that long-distance companies will pay less to local companies to begin and complete calls. The United States Telephone Association challenged the long distance industry - namely AT&T and MCI - to pay back to consumers the multi-billion-dollars they have saved due to the fee reductions.
Virginia Power has selected BellSouth Wireless Data to provide a two-way wireless data communications solution for hundreds of its field workers. The solution is designed to enhance dispatching operations that cover approximately 800 Virginia Power field personnel and their dispatchers.
New Digest is compiled by Lori A. Burkhart and Phillip S. Cross, contributing legal editors, and by Beth Lewis, editorial assistant.
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